28_AdditionalStudyQu - ACCY 302(Chen Class 27 Fall 2009 Additional Study Question Decision Trees and the Value of Information Rosetta Stone

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ACCY 302 (Chen) Class 27 Fall 2009 Additional Study Question Decision Trees and the Value of Information Rosetta Stone Exploration Co. has obtained information that suggests that an unusual formation of malachite might be found in the Sonora Desert. The deposit will cost $15 million for rights, permits, and development. There is a 40% probability that the deposit will be a success (i.e., it will provide a present value of future cash inflows of $75 million before deducting the cost of the investment). On the other hand, there is a 60% probability that the deposit will be a failure (i.e., it will provide no future cash inflows and the company will have to pay an additional $2 million in present value terms to restore the site to its original condition before Rosetta Stone began its development project). There are two approaches that can be taken to investigate this deposit further. 1) Rosetta Stone can pay $3 million to conduct a detailed geologic study of the area (this is the expensive option). If Rosetta Stone decides to perform this study, past experience indicates that for successful deposits, reports from geologic studies indicated “deposit is good” 90% of the time. For failure deposits, reports from geologic studies indicated “deposit is bad” 80% of the time. 2) Rosetta Stone can conduct a reconnaissance survey at a cost of $500,000 (this is the cheap option). These studies are less accurate. Past experience indicates that for successful deposits, reconnaissance surveys indicated “deposit is good” 70% of the time. For failure deposits, reconnaissance
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This note was uploaded on 11/08/2011 for the course ACCY 302 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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28_AdditionalStudyQu - ACCY 302(Chen Class 27 Fall 2009 Additional Study Question Decision Trees and the Value of Information Rosetta Stone

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